What is the Burn Multiple?
The Burn Multiple, firstly introduced by David Sacks, is a metric that measures how much money a company is burning relative to its growth.
It's an evolution of Bessemer Venture Partners' Efficiency Score, which you can calculate using our Efficiency Score Calculator.
How is Burn Multiple calculated?
The Burn Multiple is calculated using the following formula:
Burn Multiple = Net Burn / Net New ARR
Where:
Net Burn is the amount of money the company is losing each month
Net New ARR (Annual Recurring Revenue) is the amount of new recurring revenue added in the same period
This formula puts the focus squarely on burn by evaluating it as a multiple of revenue growth. In other words, it answers the question: how much is the startup burning in order to generate each incremental dollar of ARR?
How to Use the Burn Multiple Calculator
Our Burn Multiple Calculator is designed for simplicity and ease of use. Here's a quick guide:
Enter your Net Monthly Burn.
Enter your Net New ARR in Month.
The calculator will instantly display your Burn Multiple and provide insights based on the guidelines mentioned above.
Understanding and using the Burn Multiple
The Burn Multiple is a powerful tool for several reasons:
It's a catch-all metric: Any serious problem in a startup will eventually impact the Burn Multiple, either by increasing burn, decreasing net new ARR, or both. This makes it an excellent proxy for overall business health.
It's a measure of product-market fit: A startup that generates $1 million in ARR by burning $2 million is more impressive than one that does it by burning $5 million. The former suggests the market is pulling the product out of the startup, while the latter implies the startup is pushing its product onto the market.
It evolves with the company: The Burn Multiple should improve as a startup matures. If it's going in the wrong direction as the company grows, it's an indicator that something might be amiss, even if headline growth is still increasing.
It guides decision-making: Founders can use the Burn Multiple to make informed decisions about cost-cutting and growth strategies. It suggests how far founders need to go to reduce burn to a reasonable level for a given growth rate.
Rule of thumb values
Here are some guidelines for interpreting the Burn Multiple:
Burn Multiple < 1: World-class
Burn Multiple = 1-1.5: Great
Burn Multiple = 1.5-2: Good
Burn Multiple = 2-3: Suspect
Burn Multiple > 3: Bad
Example: If a company burns $2 million in a quarter while adding $1 million to its ARR, that's a 2x Burn Multiple — reasonable for an early-stage startup. However, if the company burned $5 million to add $1 million of net new ARR, that's a concerning 5x Burn Multiple, indicating potential inefficiencies.
It's worth noting that higher Burn Multiples may be acceptable in the earliest stages when sales are incipient and the product is still being built. However, the expectation is that this multiple will improve over time as the company matures and achieves greater efficiency.
Factors Influencing the Burn Multiple
Several factors can contribute to a high Burn Multiple:
Gross margin problems: If the company spends too much on COGS, burn will increase rapidly as it scales.
Sales efficiency issues: If customer acquisition costs are too high or sales productivity is diminishing, burn will increase relative to new ARR.
Churn: High churn rates will negatively impact net new ARR, causing the Burn Multiple to increase.
Growth challenges: If growth is stalling, the company may overspend on marketing or promotions, leading to a higher Burn Multiple.
Operational inefficiencies: Any inefficiencies in operations can lead to unnecessary burn without corresponding growth.
